CAMBRIDGE – The United States still faces a dangerous fiscal deficit, but one might not know it from the complacency that dominates budget discussions in Washington. Regarded as an urgent problem until recently, the federal deficit is now being placed on the back burner of American politics.
The shift in thinking was triggered by the revised deficit forecasts recently published by the Congressional Budget Office, the independent technical agency responsible for advising Congress on budget issues. According to the CBO’s report, the US fiscal deficit will decline from 7% of GDP in 2012 to 4% in 2013. This reduction reflects the cuts in government spending on defense and non-defense programs mandated by the budget “sequester” that took effect in March, as well as the rise in revenue caused by higher rates for income and payroll taxes since the end of 2012.
More striking is the CBO’s projection that the deficit will continue to decline rapidly, reaching just 2.1% of GDP in 2015, before rising gradually to just 3.5% of GDP in 2023, the end of the CBO’s official forecast period. That path of deficits implies that the government debt/GDP ratio will remain at about the current level of 75% for the next ten years.
Unfortunately, these headline-grabbing numbers are not likely to be borne out in reality; indeed, even the CBO does not believe that they represent what will occur. Instead, these official forecasts represent a “baseline” scenario that the CBO is required to present. The CBO’s “baseline budget” assumes that all of the deficit-reducing features in current law will remain unchanged. These include, for example, an old legislative requirement that payments to physicians in the government’s Medicare program be reduced sharply in future years, a requirement that Congress has voted each year to “postpone.”